Numbers that Explain your Start-up Potential

In my experience, there are a number of founders that are really passionate about their products. While this is great, they often shy away from the numbers and number-related conversations because it isn’t where they are comfortable. If this is you, this article will help you, not only feel more comfortable with the numbers but also give you an insight into some of the questions that you may get asked by investors – so you can be prepared.

This one may seem like a no-brainer – but you must know how you are going to make money. Understanding how you are going to make money, it helps to review competitive products and their pricing and also have an understanding of what the market will pay for a product like yours. Additionally, it is difficult to estimate revenue if you don’t know what your market size is and understand how you will get to your ideal customer. This means that behind your revenue number there should be a customer acquisition (CAC) number that helps inform how many customers you can logically get.

You should start out slow and build revenue over time.

Knowing your customer acquisition (CAC) number will help you determine what the cost will be to acquire a customer and therefore inform your marketing budget. Your marketing budget is split into acquisition, brand/awareness, and content/SEO strategy. Brand/awareness campaigns don’t directly tie to a customer conversion as acquisition campaigns do. Content and SEO campaigns are long-term strategies to convert customers. This can take you 3-9 months to build. You may want to determine the split of spend between these three areas.

Additional expense areas are:
Team members
Manufacturing or Engineering costs
Development costs
Office expense (if needed)

Debt will include any borrowed money that you need to pay back and that payback schedule.

If you have a physical product that needs to be developed, what will be the cost of developing that solution and what are the lead times.

Your valuation needs to be backed up with facts and your financials. Make sure that you understand how you got to your valuation number. The valuation will help you determine how much you think your company is worth and help the investor understand how much of your company they can get a % of for what dollar investment.

I often recommend doing three sets of projections. A low, average, and high version. Having three versions shows that you have done your homework and really worked your financial model to find holes in the process. This can make investors feel more secure with your analysis.

Here are some statistics that you should also be prepared to talk about:

CLTV – Customer Lifetime Value- This is the assessment of the lifetime value of one customer to the company. This is calculated by CLTV = (Customer value * Average Customer Lifespan). You will need to know your average purchase value and then multiply that by the average a customer is with you.

CAC – Customer Acquisition Costs – This is the assessment of the total cost to acquire a customer. This is calculated by CAC = Cost of sales and marketing divided by the number of new customers acquired.

Conversion Rate – Conversion rate refers to how many leads you are acquiring from your marketing efforts. You can calculate this by taking the number of conversions and dividing that by the number of total ad interactions that can be tracked to a conversation during the same time period.

Growth Rate – If you are pre-revenue that you will have to calculate the growth rate based on your projections month over month or year over year. To calculate the growth rate, start by subtracting the past value from the current value. Then, divide that number by the past value. Finally, multiply your answer by 100 to express it as a percentage.

Margin – Margin is calculated by dividing gross profit by revenue. This will give you your margin.

COGS – Cost of goods sold – COGS are often misunderstood and I find founders putting various things in COGS. What makes up your COGS number is products purchased for resale, raw materials, packaging, and direct labor related to producing or selling a product. Marketing is not included in COGS. COGS are simple the total amount your business has paid to produce a product.

EBITA – Earnings Before Interest Tax and Amortization – This is a measure of profitability by investors. cCalculate EBITA = Net income + Interest + Taxes + Amortization.

I hope this information has helped you determine what numbers you should know backward and forwards for your investor meetings.

About the Author:
Apryl Syed is a management consultant focused on helping organizations optimize for success in areas of customer acquisition – customer success.

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